State Street, the largest money manager for institutions, revealed potential liabilities of $27 billion today almost four times shareholder equity. Evidently, the Boston based firm has experienced difficulty in refinancing asset backed commercial paper potentially forcing off balance sheet liabilities back to the parent companies’ books. Many of these conduits, especially European entities, were prevented from rolling over short term asset backed commercial paper leading to another bottleneck in the structured finance assembly line. More importantly, these off balance sheet liabilities ($891 billion) may end up back on the balance sheets of commercial banks creating another layer of credit contraction hence the Fed’s recent discount window panic.
Lenders have about $891 billion supporting asset-backed commercial paper funds and similar investment pools, Fitch Ratings said last week. Some funds, including those managed by KKR Financial Holdings LLC, haven’t been able to refinance by selling new commercial paper. Their lenders may seize assets to get repaid, though the assets may not fully cover the loans if prices have fallen amid the subprime-mortgage crisis.
“There is a growing recognition that there is a crisis in the commercial paper market,” Bove said. “This is a big risk for State Street.”
My comments: Over the past several weeks global central banks have pumped over $400 billion into the system to re-liquefy vulnerable commercial banks exposed to asset backed commercial paper. How much longer before questionable collateral impairs lending abilities of commercial banks?
The market is now in the process of repricing risk in the structured finance world while the credit arb game runs out of players. Welcome to a modern day run on the bank.